BUSINESS LAW & PLANNING STRATEGIES
EMPLOYMENT AGREEMENTS

GENERAL CONSIDERATIONS IN USE OF EMPLOYMENT CONTRACTS

The essential terms of an employment contract are the names of the parties, the date and place of employment, compensation, and the employee’s duties. Travelers Ins. Co. v WCAB (1967) 68 C2d 7, 17. The principal advantage of an employment contract is that it provides certainty by defining the essential terms of the employment relationship. Terms that are not defined by an agreement can be defined by the parties later, and these later agreements serve as modifications of the original agreement. A well-drafted agreement should attempt to anticipate questions that might arise between the parties later to minimize the likelihood of future disputes.

The following are some typical objectives in drafting an employment agreement:

  • Defining the employee’s position, compensation, duties, and performance expectations;
  • Defining the circumstances in which employment will be terminated;
  • Securing the employee’s services for a specific period, if desired, so that business goals may be attained;
  • Protecting the employer’s intellectual property from unfair competition;
  • Avoiding litigation; and
  • Defining a forum and mechanism for resolving employment disputes (e.g., through the use of agreements to mediate or arbitrate disputes).

An employment contract is an agreement between an employer and an employer regarding the term of employment.

An employment contract can come about, under California law, from a an oral statement words to that effect (“The job is yours is you want it; when can you start?”) to a complex written contract prepared by an attorney.

An employment contract may be in any of the following formats, which surprises many people:

  • written,
  • oral, or
  • implied.Whatever form the contract takes, its terms will depend on what the employer and employee have agreed to (or, in the case of an implied contract, what each side expressed by their words and actions).

At-Will Employment Contracts

Most employees in California are presumed to work at will. This means they can quit at any time, and can be fired at any time, for any reason that is not unlawful under California or federal law. (Examples of ‘Illegal’ reasons for firing include discrimination and retaliation.). In many ways, the employer has had their hands tied by the government and the courts in trying to terminate bad employees.

Courts, in many circumstances, read into the employment contract, a covenant not to fire an employee without good cause. For that reason, it is very important for the employer to have an attorney prepared employment agreement, even for at will employees, and signed by the employee.

An employment contract doesn’t necessarily change an employee’s at-will status: An employer and employee can agree on important details about the job without agreeing that the employee will have job security or permanent employment. In fact, many employers require employees to sign written employment agreements explicitly acknowledging that they will be employed at will.

EXAMPLE: When ACCO Company hires  Joe, the human resources director sends him a letter formally offering the job, which includes information about the position, salary, reporting relationships, job duties, and work hours. The letter also clearly states that Joe will work at will. The CEO signs and sends two copies of the offer letter and asks Joe to sign and return once copy, to indicate his acceptance of the position on the terms offered. Once signed by employer and employee, the offer letter becomes a written contract for at-will employment.

Even though an at-will employee can be fired at any time for any legal reason, that employee still has the right to enforce the terms of an employment contract. For example, assume an employee signs a written employment agreement that includes an at-will provision and a severance pay formula. After a year, the employee is fired. The employee may not rely on the contract to challenge his firing; it says he can be fired at will. However, if the company paid him only half of the promised severance amount, he could sue for breach of that contractual provision.

 

Written Agreements

A written contract is a document that sets form the terms of employment. As explained above, some written contracts are for at-will employment. Others limit the employer’s right to fire. For example, it’s not unusual for high-level executives to be hired pursuant to a written contract that obligates them to stay with the company for a set period of time (two or three years, for instance) and obligates the company to retain the executive for the same period absent an action specified in the contract as grounds for termination. Grounds might include misconduct by the executive, such as committing a felony or engaging in financial malfeasance; they might also include outside events, such as a sale of the company.

Oral Contracts

An oral contract is simply an agreement that is spoken rather than written down. For example, an employer might call a successful applicant on the phone, offer him the job, and settle on a starting date, salary, and schedule. Once the employee says, “I accept,” there is an oral contract of employment.

Oral contracts are just as enforceable as written contracts, but harder to prove. If there’s a dispute, it will be the employee’s word against the employer’s.

Similar to a written contract, an oral contract might be for at-will employment or it might limit the employer’s right to fire. If, for example, an employer says, “I need a one-year commitment from you; during that time, the company won’t fire you as long as you perform,” and the employee agrees, the employee can hold the employer to that one-year commitment. If the employee is fired for any reason other than failing to hit the company’s numerical goals, that’s a breach of contract.

Implied Contracts

An implied contract is one that has not been put into a formal document or even stated explicitly, but is instead implied from a combination of the employer’s oral and written statements and actions. Whether there’s an implied contract typically comes up after an employee has been fired. The employer argues that the employee was at will, and so can’t sue for breach of contract; the employee counters that the employer’s actions and statements led the employee to believe that the employee would be fired only for good cause, and were sufficient to create a contract to that effect.

Following are the most common factors courts consider in deciding whether an implied employment contract was created:

  • Whether the employer gave the employee assurances of job security. For example, if the employer says that the employee will be fired only for good cause or will have a job as long as he or she performed well, that might lead a court to find that an implied contract exists.
  • Whether the employer’s policies limit its right to fire at will. For example, progressive discipline policies that don’t give the employer leeway to depart from the stated procedures, policies providing that new employees become “permanent” after completing a probationary period, policies promising regular promotions and raises if performance meets a certain standard, and policies requiring good cause to fire might be used as evidence that the employer had given up the right to fire at will.
  • The employee’s tenure. A long-term employee who has received regular promotions, raises, and positive performance evaluations has a stronger argument at making an implied contract claim than a short-term employee.

Warning: Generally, if the employee signs an at-will agreement, a court will not allow the employee  to argue that they  actually had a contradictory implied contract; the written agreement will be the final word on the subject if the written contract contains terms indicating that it is meant to supersede all other agreements, written, oral or implied and cannot be modified except in writing signed by the parties. There are some exceptions. Thus, the employer should always have the employment agreement prepared by an attorney.